Initial Coin Offerings (ICOs): Legit or Fraud?

In November of 2017, the highly promising blockchain based start-up Confido made headlines by selling over $374,000 worth of tokens for their ICO. But by late November, Confido, then close to making its $400,000 cap, suddenly disappeared. All traces of its presence online were suddenly pulled down, including their website, social media and Medium accounts. The initially trusting investors were left without a statement on what was coming next or where their tokens had gone.

The situation has highlighted a major problem with the new concept of Initial Coin Offerings. Are they safe? They are an as innovative a concept as can be, but can they be trusted?

What is an ICO?

With an Initial Coin Offering, a start-up or company creates a token (or virtual coin) that they sell in exchange for cryptocurrencies such as bitcoin to potential investors using distributed ledger technology, also known as blockchain technology. ICOs are commonly issued by new companies dealing with new complex technology that is aimed at disrupting existing technologies or changing an industry.

Just like with crowdfunding, the start-up declares a specific amount of money it needs to raise in order to start operation, and then a fundraising operation starts between investors. The companies offering ICOs usually promote their token on their own websites, from where investors can purchase them, either in fiat or virtual currencies.

Look for these basic features before investing in an ICO.

A well designed website detailing the start-ups’s mission and goals. It should also highlight the team behind the start-up, and offer enough information to investors to confirm its existence and background.

Investor background information. Do a search on the internet for any information about the faces behind the start-up, including their LinkedIn and other social media profiles, online comments, newspaper mentions and more. You should also find out if they are registered, accredited financial professionals with any prior mention in the cryptocurrency community.

A company white paper. Companies offering ICOs regularly provide their investors with white papers describing the process or product they intend to create. Read through the fine print of the available white paper to understand the bits and pieces and pieces of what comes along with your token purchase.

The white paper has to explain the technicalities and goals of the project in all their complexity. ICO goals tend to be complex and quite technical, but if the goals are unrealistic, reconsider your investment.

An open GitHub or Sourforge account. The project should provide links to a GitHub or Sourceforge code page, showing how far the project has gone.

You should also find out if the ICO is registered with the SEC if its offer of tokens constitutes a security offering.

The team behind the ICO must also reveal the following details to you:

Your rights and benefits as investor in the start-up.

The existing precautions in place to protect against fraud and trafficking.

The existing risks associated with the investment.

How you can get your money back

As it happens, some countries are already wary of ICOs.

Techcruch reported in September 2017 that South Korea was banning ICOs due to concerns over the potential for financial scams. China had already made a similar move, branding the new funding format ‘an unauthorized and illegal public financing activity’, despite its growing popularity across the world. The Confido incident and other recent ICO fraud cases have officially cemented these fears for investors, some of whom have started bailing out.

But this doesn’t mean that ICOs are mostly scams. Initial Coin Offerings can still be trusted. The Securities and Exchange Commission has warned against ICOs, but offered advice on how to sniff scams and avoid them. If you intend to invest, there are still many genuine start-ups on the internet right now with favourable ICOs. All you have to do is dig deeper than the surface.